The pattern within that broad universe should not be a surprise to anyone familiar with the course of events since serious evidence of the credit crunch came into being in early 2007. More specifically, investors have fled assets that are perceived to be higher risk in favour of safety. The most notable effect has been the sell off of small- and mid-caps in favour of steadier large-caps. It goes without saying that exposure to banks or to companies with high levels of debt has been bad for investor's financial health. Resources issues have remained strong. These trends are evident in t
he fund arena: The Morningstar Europe ex UK Small/Mid Cap category is down 9.1% over the past year, compared to a drop of just 2.8% for the Morningstar Europe ex UK Large Cap category. Similarly, top performers had, on average, more exposure to industrials and energy issues, and less exposure to financial services than did poorer performers.
All of this reflects a very short period of time, however, and picking a fund based on what has worked over the past year is about as poor a recipe for success as we can imagine. One example of this worth spending some time on is Tim McCarron's Fidelity European. Probably the best known fund in the sector, it struggled during portions of 2007. That owed much to a huge financial services stake, and (initially) little in resources issues. The fund had a 50% weight in the sector in February 2007 (about 28% of this was in banks), and was still sitting at 30%+ (roughly 16% banks) by October. By year end, the stake had receded to 21%, and it stood at just 16% at year-end. Instead, McCarron piled into telecoms, healthcare, energy, and industrials. That helped him steady the fund, and it's back near the top of the charts on a one year basis and still looks quite strong over the longer-term as well.
The point here is that McCarron had done well enough over time and had enough research support that getting worked up over a bad few months in the heat of the credit crisis would have been a mistake. It should also be noted that David Allen and his colleagues at Fidelity have undertaken a very sensible restructuring of the research team--one that we think should help position the firm well for the future. In short, we think this remains a very good choice in the sector, albeit investors must recognise that with the sector bets McCarron takes, there will be some rocky patches. (We do, however, wish it was cheaper. It's 1.71% TER isn't egregious, but Fidelity could really seize a market leadership position here by passing economies of scale along to investors and keeping fees lower.)
As for those funds that have fared best during the past year, some of them are very good investments, but not simply because of recent performance. We don't have space to highlight them all, but Chris Rice at Cazenove European has shown a tremendous ability to deliver consistently strong performance with low volatility during his five plus years at the helm. Moreover, the A shares are available for a not-stratospheric £25,000 minimum with an annual TER of just 1.13%. We also like Raj Shant's Newton Continental European. It has proven the strength of its thematic approach over a reasonably substantial period of time, and is well worth a look for core Europe ex-UK exposure.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
